Whether your business is large or small, you need a good inventory turnover ratio for your business to thrive. Without good turnover, you can’t pay lenders, employees, or suppliers, and overhead costs could go through the roof. But what ratio do you need to keep your business healthy?
An inventory turnover ratio between 4 and 6 is usually a good indicator that restock rates and sales are balanced, although every business is different. This good ratio means you will neither run out of products nor have an abundance of unsold items filling up storage space.
If you calculate the turnover ratio for each of your products, it will help you determine what your customers want and need while keeping your business out of the red.
Inventory turnover ratio is a calculation that shows how many times a product or service was sold and replaced within a given timeframe. It represents your company’s ability to sell items without stockpiling them.
Low – If a product or service has a low inventory turnover ratio, it’s selling slowly. And it’s probably overstocked. A low ratio creates additional expenses:
High – A high ratio means that an item sells well, but it could also indicate that there’s not enough of it in stock. And there are disadvantages to a higher-than-average inventory turnover ratio.
Learn more about inventory turnover and what it can tell you about your business.
You can determine the inventory turnover ratio for a product with this calculation:
Cost of goods sold for 12 months ÷average inventory value during the same 12 months
Cost of goods sold – It’s your cost to produce your sold product—not the selling price. It includes expenses for materials, labor, distribution, sales force, and all direct or indirect costs related to an item.
Average inventory value – It is the inventory value of a product within a specific period.
$300,000 cost of goods sold for 12 months
$125,000 average inventory value for the same 12 months=2.4
You turned the inventory 2.4 times during the 12 months.
Learn more about important inventory formulas and ratios that can help you analyze your business’s key performance indicators.
If you stock more than a handful of products, it can be time-consuming to calculate the inventory turnover ratio for each of them. But Sortly’s inventory management software can provide you with reports and data on demand, making your calculations a breeze.
Sortly makes it easy to get started:
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